Should the Rich Pay for Fiscal Adjustment? Income and Capital Tax Options Thomas Piketty Paris School of Economics Brussels, ECFIN Workshop, October 18 2012
This talk: two points 1. The rise of European wealth-income ratios - Top income shares much more in US than in Europe - But wealth-income ratios much more in Europe (EU GDP: 12tr ; net private wealth: 60tr = 500% GDP) (memo: China s reserves < 3tr : 20 times smaller) In Europe, main fiscal reserve = wealth taxation (while in US, main reserve = top income taxation) 2. A proposal for a European wealth tax - A comprehensive wealth tax with rate 1% above 1m and 2% above 5m would raise 2% of EU GDP - Other options (top income tax, corporate tax, FTT) are also useful, but raise less revenue
1. The Rise of European wealth-income ratios Top income shares much more in US than in Europe World Top Incomes Database: 25 countries, annual series over most of 20 C, largest existing historical data set on income inequality In US, top 10% income share rose from 35% to 50% of national income (top 1% share rose from <10% to >20%) and absorbed 70% of macro growth over 1980-2010 In Continental Europe, there was also a rise in top income shares, but it started later (mid 1990s rather than early 1980s) and was quantitatively much smaller F Hollande s 75% top rate above 1m would be much more useful in US than in France
50% 45% 40% 35% 30% 25% 1917 1922 Share of total income going to Top 10% 1927 1932 1937 1942 1947 1952 1957 1962 1967 1972 1977 1982 1987 1992 1997 2002 2007 FIGURE 1 The Top Decile Income Share in the United States, 1917-2010 Source: Piketty and Saez (2003), series updated to 2010. Income is defined as market income including realized capital gains (excludes government transfers).
25% 20% 15% 10% 5% 0% 1913 1918 1923 1928 1933 1938 1943 1948 1953 1958 1963 1968 1973 1978 1983 1988 1993 1998 2003 2008 Top 1% (incomes above $352,000 in 2010) Top 5-1% (incomes between $150,000 and $352,000) Top 10-5% (incomes between $108,000 and $150,000) FIGURE 2 Decomposing the Top Decile US Income Share into 3 Groups, 1913-2010 Share of total income accruing to each group
30 25 20 15 10 5 0 Top 1% share: English Speaking countries (U-shaped), 1910-2010 Top Percentile Share (in percent) 1910 1915 1920 1925 1930 1935 1940 1945 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 United States United Kingdom Canada Australia Ireland New Zealand
30 25 20 15 10 5 0 Top 1% share: Continental Europe and Japan (L-shaped), 1900-2010 Top Percentile Share (in percent) 1900 1905 1910 1915 1920 1925 1930 1935 1940 1945 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 France Germany Netherlands Switzerland Japan Sweden
30 25 20 15 10 5 0 Top 1% share: Continental Europe, North vs South (L-shaped), 1900-2010 Top Percentile Share (in percent) 1900 1905 1910 1915 1920 1925 1930 1935 1940 1945 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 France Germany Spain Italy Sweden
Share of total income going to top 10% (incl. realized capital gains 50% 45% 40% 35% 30% Top Decile Income Shares 1910-2010 U.S. U.K. Germany France 25% 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010 Source: World Top Incomes Database, 2012. Missing values interpolated using top 5% and top 1% series.
But wealth-income ratios much more in Europe Results from Piketty-Zucman, «Capital is Back: Wealth-Income Ratios in Rich Countries 1870-2010» How do aggregate wealth-income ratios evolve in the long run, and why? Until recently, it was impossible to adress properly this basic question: national accounts were mostly about flows on income, output, savings, etc., and very little about stocks of assets and liabilities In this paper we compile a new data set of national balance sheets in order to adress this question: - 1970-2010: US, Japan, Germany, France, UK, Italy, Canada, Australia (= top 8 rich countries) - 1870-2010: US, Germany, France, UK (official national accounts + historical estimates)
Result 1: we find in every country a gradual rise of wealth-income ratios over 1970-2010 period, from about 200%-300% in 1970 to 400%-600% in 2010 Result 2: in effect, today s ratios seem to be returning towards the high values observed in 19 c Europe (600%-700%) This can be accounted for by a combination of factors: - Politics: long run asset price recovery effect (itself driven by changes in capital policies since WWs) - Economics: slowdown of productivity and pop growth Harrod-Domar-Solow: wealth-income ratio β = s/g If saving rate s=10% & growth rate g=3%, then β 300% But if s=10% & g=1.5%, then β 600% Explains long run change & level diff Europe vs US
800% Private wealth / national income ratios, 1970-2010 700% 600% USA Germany UK Canada Japan France Italy Australia 500% 400% 300% 200% 100% 1970 1975 1980 1985 1990 1995 2000 2005 2010 Authors' computations using country national accounts. Private wealth = non-financial assets + financial assets - financial liabilities (household & non-profit sectors)
Private wealth / national income ratios, 1970-2010 (incl. Spain) 800% 700% USA Japan Germany France UK Italy Canada Spain Australia 600% 500% 400% 300% 200% 100% 1970 1975 1980 1985 1990 1995 2000 2005 2010 Authors' computations using country national accounts. Private wealth = non-financial assets + financial assets - financial liabilities (household & non-profit sectors)
800% Private wealth / national income ratios in Europe, 1870-2010 700% Germany 600% France 500% UK 400% 300% 200% 100% 1870 1890 1910 1930 1950 1970 1990 2010 Authors' computations using country national accounts. Private wealth = non-financial assets + financial assets - financial liabilities (household & non-profit sectors)
800% Private wealth / national income ratios 1870-2010 700% USA 600% Europe 500% 400% 300% 200% 100% 1870 1890 1910 1930 1950 1970 1990 2010 Authors' computations using country national accounts. Private wealth = non-financial assets + financial assets - financial liabilities (household & non-profit sectors)
800% 700% Private vs governement wealth, 1970-2010 (% national income) USA Japan Germany France 600% UK Canada Italy Australia 500% 400% 300% 200% 100% Private wealth Government wealth 0% -100% 1970 1975 1980 1985 1990 1995 2000 2005 2010 Authors' computations using country national accounts. Government wealth = non-financial assets + financial assets - financial liabilities (govt sector)
2. A Proposal for a European Wealth Tax Comprehensive wealth tax based upon market-value personal net worth = non-fin. + financial assets liabilities Very different from 19 c style wealth tax based upon cadastral values ( repealed in Germany, Spain, Sweden..) Closer to French ISF (annual wealth returns with assets valued at market prices; ISF created in late 20 c : inflation) But with a broader tax base than ISF, and with returns prefilled by tax administration on the basis of information transmitted by banks It requires a lot of information, but this is technically doable Key is political: we should not have free trade agreements without automated cross-border information exchange on financial assets and financial flows
An illustrative tax schedule: Marginal tax rate = 1% if net wealth > 1m (about 2,5% of EU pop) Marginal tax rate = 2% if net wealth > 5m (about 0,2% of EU pop) Simulations: this would raise 2% of EU GDP Why so much revenue? For two reasons: (1) Aggregate private wealth is very large : 500% GDP (2) Wealth is highly concentrated: top 10% wealth holders have 60% of aggregate wealth, and top 1% have 25% I.e. top 1% wealth tax base = 125% of GDP (top 2.5% wealth tax base = 200% GDP, top 0.1% = 50%)
Other options raise less revenue FTT: less than 0,5% GDP (much less if successful) (double dividend illusion) Top income tax: about 0,5% GDP with a 20% supplementary tax rate on top 1% incomes (100 000+) (top 1% income tax base = 5% GDP) Corporate tax: about 1% GDP with a 10% supplementary tax rate on corporate profits (corporate tax base = 10%-12% GDP) all these options are useful, especially corporate tax, given tax competition and large decline in rates; but in the long run the wealth tax is even more useful
38% 36% 34% 32% 30% Corporate tax competition in the EU Average statutory corporate tax rate (EU 27) Average effective corporate tax rate (EU 27) 28% 26% 24% 22% 20% 1995 1997 1999 2001 2003 2005 2007 2009 2011 Source: Taxation trends in the EU, Eurostat 2011
50% 48% 46% 44% Personal income tax competition in the EU Average top personal income tax rate (Euro zone) Average top personal income tax rate (EU 27) 42% 40% 38% 36% 1995 1997 1999 2001 2003 2005 2007 2009 2011 Source: Taxation trends in the EU, Eurostat 2011
Summing up Eurotax can be useful if it helps member countries raise the tax revenue (1) that are adapted to their economic fundamentals; (2) which they cannot raise on their own Wealth tax meets the two criteria Top income or corporate tax meets also the two criteria; corporate tax is a tempting and useful option, especially given large decline in tax rate; but in the long run wealth tax is even more useful: it raises more revenue, and in a more efficient manner (better to tax stock rather than flow) VAT or general income or payroll tax increase meets none of the criteria: it is not adapted to economic fundamentals, and countries can easily raise them alone
Supplementary slides
Share of total income going to Top 10% 50% 45% 40% 35% 30% 25% Including capital gains Excluding capital gains 1917 1922 1927 1932 1937 1942 1947 1952 1957 1962 1967 1972 1977 1982 1987 1992 1997 2002 2007 FIGURE 1 The Top Decile Income Share in the United States, 1917-2010 Source: Piketty and Saez (2003), series updated to 2010. Income is defined as market income including realized capital gains (excludes government transfers).
100% Top Income Tax Rates 1910-2010 Top marginal income tax rate applying to top income 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% U.S. U.K. Germany France 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010 Source: World Top Incomes Database, 2012.
800% The changing nature of national wealth, UK 1700-2010 (% national income) 700% 600% 500% 400% 300% 200% Net foreign assets Other domestic capital Housing Agricultural land 100% 0% 1700 1750 1810 1850 1880 1910 1920 1950 1970 1990 2010 National wealth = agricultural land + housing + other domestic capital goods + net foreign assets
Concepts & methods National income Y = domestic output Y d + r NFA Private wealth W = non-financial assets + financial assets financial liabilities (household & non-profit sector) β = W/Y = private wealth-national income ratio Govt wealth W g = non-fin + fin assets - fin liab (govt sector) National wealth W n = W + W g = K + NFA with K = domestic capital (= land + housing + other domestic k) NFA = net foreign assets β n = W n /Y = national wealth-national income ratio Domestic output Y d = F(K,L) (L = labor input) (e.g. K α L 1-α ) Capital share α = r β (r = average rate of return to wealth)
Table 2: Growth rate vs private saving rate in rich countries, 1970-2010 Real growth rate of national income Population growth rate Real growth rate of per capita national income Net private saving rate (personal + corporate) (% national income) U.S. 2.8% 1.0% 1.8% 7.7% Japan 2.5% 0.5% 2.0% 14.6% Germany 2.0% 0.2% 1.8% 12.2% France 2.2% 0.5% 1.7% 11.1% U.K. 2.2% 0.3% 1.9% 7.3% Italy 1.9% 0.3% 1.6% 15.0% Australia 3.2% 1.4% 1.7% 9.9%
Observed vs predicted private wealth / national income ratio (2010) Observed wealth / income ratio 2010 700% 650% 600% 550% 500% 450% 400% 350% 300% Italy Japan France U.K. Australia U.S. Canada Germany 300% 350% 400% 450% 500% 550% 600% 650% 700% Predicted wealth / income ratio 2010 (on the basis of 1970 initial wealth and 1970-2010 cumulated saving flows) (additive decomposition, incl. R&D)
900% National vs foreign wealth, 1970-2010 (% national income) 800% 700% 600% USA Germany UK Canada Japan France Italy Australia 500% 400% 300% 200% 100% National wealth Net foreign wealth 0% -100% 1970 1975 1980 1985 1990 1995 2000 2005 2010 Authors' computations using country national accounts. Net foreign wealth = net foreign assets owned by country residents in rest of the world (all sectors)
110% National income / domestic product ratios, 1970-2010 105% USA Germany UK Canada Japan France Italy Australia 100% 95% 90% 1970 1975 1980 1985 1990 1995 2000 2005 2010 Authors' computations using country national accounts. National income = domestic product + net foreign income
900% 800% 700% 600% USA Germany UK Canada Domestic capital / output ratios, 1970-2010 Japan France Italy Australia 500% 400% 300% 200% 100% 1970 1975 1980 1985 1990 1995 2000 2005 2010 Authors' computations using country national accounts. Domestic capital/output ratio = (national wealth - foreign wealth)/domestic product
40% 36% 32% 28% Annual inheritance flow as a fraction of disposable income, France 1820-2008 Economic flow (computed from national wealth estimates, mortality tables and observed age-wealth profiles) Fiscal flow (computed from observed bequest and gift tax data, inc. tax exempt assets) 24% 20% 16% 12% 8% 4% 0% 1820 1840 1860 1880 1900 1920 1940 1960 1980 2000 Source: T. Piketty, "On the long-run evolution of inheritance", QJE 2011
40% 36% 32% 28% Figure 1: Annual inheritance flow as a fraction of national income, France 1820-2008 Economic flow (computed from national wealth estimates, mortality tables and observed age-wealth profiles) Fiscal flow (computed from observed bequest and gift tax data, inc. tax exempt assets) 24% 20% 16% 12% 8% 4% 0% 1820 1840 1860 1880 1900 1920 1940 1960 1980 2000
100% 90% 80% 70% U.S. U.K. France Top Inheritance Tax Rates 1900-2011 60% 50% Germany 40% 30% 20% 10% 0% 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010